Business Debt Consolidation – Cash Flow is King?

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During these difficult times business owners search for any angle on how to reduce costs. Consolidating business debt into commercial mortgages can be a "clean" and reliably easy way to increase cash flow, but there is risk and a cost to do this.

Commercial mortgages, and other debt, such as lines, equipment loans, business credit cards, etc are often closely examined. Taking business credit card debt or short term equipment loans (that are often in around 7 year amortization schedules) and tying them into long term, 25 year or 30 year amortization schedules can have dramatic impact on cash flow, (It's not uncommon to see a 60% savings or more) but the borrower pays for this by paying higher interest amounts over the long term and reduces their wealth by using hard earned equity.

For example, I am currently working on an owner employed facility in Arizona, it's a light industrial property and my client has been in business for 7 years. The building appraised for $ 1,800,000 and has a current mortgage of $ 850,000 with a monthly payment of $ 5,800 (25 year at 7%). He has over $ 300,000 of equipment and business credit card debt with a total monthly payment of $ 5,100 that is really hurting the company's profits. Total monthly payments between the mortgage and various debts equals $ 10,900.

We are combining that debt into a 10 year fixed, 30 year amortization mortgage, the rate is 6.8% only .20% better than his existing, but the new payment will be $ 7,351 with a cash flow savings of $ 3,548 per month or $ 42,576 annual. Looks appealing, after all he will have the cost to refinance the debt "paid back" in 2 months and will enjoy the discounted payment for years to come. But, should he really do this? It's a tough call and one that only he can decide.

In his case, his business is really struggling and the cash flow savings will be a big relief both mentally and financially. Frankly, it's a matter of survival for him. He could use some of his personal savings to pay down the credit card and equipment debt but he is unwilling to do this. So in effect he is tying up $ 300,000 worth of equity, and reduces his net worth by the same, and increasing his long term aggregate interest payments – no free lunch. Although do to his situation, I can see and understand why he elected to go this route.

However, if his situation was different, and his business was more stable and making solid money I would recommend that he look at other options first, like paying down his debt the old fashion way – month by month. By down the business credit card first, then take those savings and apply them against the equipment loans. He could look at possibly taking on an equity partner or perhaps refinancing his existing debt but keeping it on the same amortization schedule and keeping the debt tied to the existing assets.